Why Stiglitz is selling us a lemon

As a young postgraduate economics student, I revered the work of the American economist Joe Stiglitz for its rigour and insight. But his comments during his visit to Australia do not pass muster.

Stiglitz's idea is that inequality will cripple us if we don't apply the Robin Hood principle. Whilst relevant in the United States, this narrative is misplaced in an Australian context.

A fundamental historical feature of the Australian economy is high and rising real wages driven by strong labour productivity and relative labour scarcity. Whilst unions might like to claim credit for high wages, more fundamental forces have been at work.

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High real wages have been with us since European settlement, and have stayed with us right the way through, driving extraordinary innovations like mechanised shearing and automated mining.

The United States and many other OECD countries have seen a steady inflow of unskilled labour through controlled and uncontrolled immigration. In the US, this started with slave labour and is now based on mass Hispanic immigration.

By contrast, Australia's immigration programs, whilst liberal, have been aggressively skill based. Nowhere was this clearer than in our post war immigration program, which focused on skilled tradesmen and engineers required for enormous projects like the Snowy Scheme.

Demand for labour has stayed strong for much of our history due to massive, ongoing investment in a range of primary industries. This pattern started with the wool industry in the 1830s, moving to gold in the following decades, returning to wool and then transitioning to minerals and energy after the war. Much of this success has been driven by foreign investment.

Massive investments in Australian agriculture, minerals and energy have made labour productive and scarce for much of our history, despite occasional periods of higher unemployment.

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In a masterful presentation in May, outgoing Treasury secretary Martin Parkinson explained how important this has been in the last two decades.

Parkinson's point is simple. If you look at most OECD countries, real wages have been near stagnant for decades, despite improving labour productivity. Moreover, the situation has been worse for those earning the least. In short, the traditional promise that rising productivity is good for everyone has not held true in much of the developed world, particularly the USA.

Australia is different. We have seen strong improvements in labour productivity in the private sector, and even stronger increases in real wages.

We have suffered shortages of labour as massive private sector investments (mostly in mining and construction) created new jobs. If we have a problem, it is that excessive real wage growth has driven unemployment and underemployment. It also turns out that despite the strength of our skilled workforce, only a very small portion of recent gains in labour productivity stemmed from improved skills and education.

In a blow to the 'occupy' crowd who see academics like Stiglitz as their spiritual leaders, real wages in Australia have risen almost as much for the lowest earners as the high earners - an extraordinary achievement.

Stiglitz's most famous academic work focused on markets where sellers know more than buyers – the 'lemons' problem, named after clapped out cars flogged to unsuspecting buyers by unscrupulous used car salespeople. He knows salespeople with a good reputation can solve this problem by providing a kind of quality guarantee.

Stiglitz is selling an idea to Australians on the back of his Nobel laureate reputation. But the idea that redistribution will be at the heart of our future success and prosperity is a lemon.

A skilled and motivated workforce and strong demand for these workers in highly productive industries can deliver Australia's future prosperity in an egalitarian way - just as it has for two centuries. We don't need a massive redistribution campaign – we need to nurture and sustain our proven economic model.